As I pointed out in my previous post, Schedule SE explicitly directs you multiply your business profits by 92.35%. This is to level the playing ground with W-2 employees. A W-2 employee’s FICA taxes are based on their W-2 Box 1 wages. The employer is paying FICA on that amount. However, a self-employed individual is both employer and employee and pays both halves as SE taxes. So the base for calculating SE taxes is reduced by 7.65%. Note: It is 92.35% even if you are only subject to Medicare SE taxes. It would be a recursive calculation otherwise and the IRS decided to simplify the calculation.
Yes, I did have a typo of $804 -> $604 and carried that through. $60000 – $804 = $59,196. Your maximum employer contribution is $59,196 * 20% = $11,839.Click to expand…
Lightbulb! I understand why now. Even though I am not paying more in SS tax, having already maxed that out, I still have to reduce 1099 income by that amount, 7.65%, so that I don’t get to tax defer MORE than my W2 counterparts. That is what you meant by “leveling the playing ground with W-2 employees.” This doesn’t increase my SS tax, but it does decrease my tax deferred allowable amount.September 6, 2019 at 6:44 am MST #244191
its not different.Click to expand…
Unlike Qualified plans, Non-qualified plans are subject to the tax-matching rule; the employer receives a tax deduction only when an employee has taxable income.September 6, 2019 at 6:55 am MST #244194PedsModeratorStatus: PhysicianPosts: 4447Joined: 01/08/2016
thats not the question i was answering.September 6, 2019 at 6:57 am MST #244196spiritriderParticipantStatus: Small Business OwnerPosts: 1907Joined: 02/01/2016
Lightbulb! I understand why now. Even though I am not paying more in SS tax, having already maxed that out, I still have to reduce 1099 income by that amount, 7.65%, so that I don’t get to tax defer MORE than my W2 counterparts. That is what you meant by “leveling the playing ground with W-2 employees.” This doesn’t increase my SS tax, but it does decrease my tax deferred allowable amount.Click to expand…
Not quite right.
You reduce your business profits by 7.65% to calculate less SE taxes, but your self-employed earned income = business profits – your actual 1/2 SE tax. If your W-2 Box 3 Social Security (SS) wages are > the SS maximum wage base, your SE tax rate is 2.9%.
- SE taxes = business profits * 92.35% * 2.9%.
- Self-employed earned income = business profits – 1/2 the above SE taxes.
thats not the question i was answering.Click to expand…
Ok. But still very different not being able to put as much in. I saw this on another post and found it helpful. Taking into account expense ratio (not counting the ER of the actual fund purchased) is different too when maxing a mega BD Roth IRA at 37,000 vs 56,000. For example, mysolo401k.net will set it up for 500, then charge 125/yr to maintain plan document. At some point you have to wonder if it is even worth it, just forget it and invest in taxable.
yr 1: $500/$37K = 1.35%
yr 1 $500/$56K = 0.89%
yr 5 $500 + 125*4 = 1000/37K*5yrs = 0.54%
yr 5 $500 + $125*4 = 1000/56k*5yrs = 0.35%September 6, 2019 at 12:07 pm MST #244282